Entrepreneurship 1: Lecture 7 Determining your Initial Capital Requirement Avimanyu (Avi) Datta, Ph.D.

Determining your initial Capital Requirement SBA worksheet provides a quick and simple method of estimating your initial capital requirement Numerous Business with profit potential do not make it because they run out of money. Focusses mainly amount of money needed to get your business through the first few months. The SBA worksheet encourages you to have a sufficient amount of cash to meet various contingencies that may arise in the first few years of operation initial_capital_requirement.xlsx initial_capital_requirement.xlsx

STEP 1: Estimating your First year Sales Estimating Target Market Potential ◦ Census Retail Trade Data  Reports total sales of your type of product by segments. Free. ◦ Industry Reports: IDC, Gartner, Frost & Sullivan etc. Could be tailored to your need. Expensive ◦ Census Data may be dated so you need to forecast.

STEP 1: Estimating your First year Sales Estimating Target Market Potential..contd ◦ Get trade data on what portion of overall sales comes from each segment of the market. ◦ Get this data to see your target market. ◦ Multiply overall market by your target market (percentage) to get your target sales ◦ Eg overall sales = $5,000000, your segment is 60% of the market, thus $3, Of which, you want to capture 50% of the market. Thus, sales = $1,

STEP 1: Estimating your First year Sales Estimating your market size ◦ Market size = Shipment * Average Unit price ◦ Estimate a growth in market too. ◦ So suppose your unit shipment is 50,000 and AUP is $100, then market size = $5, ◦ If the market grows by 3% a year, then on your second year market size would be $5,000000*1.03= $5,150000

STEP 1: Estimating your First year Sales Estimating your market size… contd ◦ Keep in mind the sales to asset ratio. ◦ For some business for every $10,000 of sales $5000 in asset is required, of which $2000 ill be inventory, $500 for additional fixtures, $2000 for additional space, and $500 for receivables and cash. ◦ Projected sales will also be affected by the number of additional people needed to be employed to take care of growing markets.

STEP 2: Estimating your Cash Outlays Owners or Manager’s Salary ◦ How will you pay your self? (MISTAKE) ◦ SBA worksheet recommend that you double the figure in column 1 and pace this figure in column 2. ◦ Rationale  if your business is running short in cash you may want to forgo a part of your salary until things get better. ◦ Put three times the managers salary in column 2. Manager may be less willing to postpone his/her salary

STEP 2: Estimating your Cash Outlays Salary and Wages ◦ No of people other that the manager who will be employed ◦ No. of hours they will work each month ◦ Hourly wages Payroll related outlays ◦ Social Security ◦ Medicare ◦ Unemployment taxes ◦ Workers’ compensation coverage

STEP 2: Estimating your Cash Outlays Rent ◦ Multiply your monthly rent by 3 for your SBA worksheet Advertising ◦ Rule of thumb-  4% of sales on advertisement. Thus, if sales goal is $1, advertisement cost will be $25,000

STEP 2: Estimating your Cash Outlays Telephone Insurance Loan payments Equipment leases/ Service Contracts Legal and Professional Fee ◦ Attorneys and Accountants Maintenance Expenses Miscellaneous Outlays

STEP 3: Identifying starting costs that you need to pay only once Fixtures and Equipment Installation of Fixtures and Equipment Decorating and Remodeling Starting Inventory (calculate Stock-turn ratio) ◦ Need annual cost of goods ◦ Average inventory turover

STEP 3: Identifying starting costs that you need to pay only once Starting Inventory (calculate Stock-turn ratio) ◦ Need annual cost of goods  Projected levels of sales (e.g. $500,000,source: your estimate)  Cost of goods sold id X% of sales (e.g. 50%, source: trade data)  Thus, annual cost of goods sold = $250,000 ◦ Average inventory turnover  Stock turn rate ( 4 times a year, source: trade data) ◦ Stock-turn ratio = $250,000/4 = $62,500

STEP 3: Identifying starting costs that you need to pay only once Deposits Legal and Professional Fees License Permits and Fees Grand Opening Advertising and Promotion Accounts Receivable. ◦ Try keeping a zero balance ◦ Very Frustrating Cash Others

STEP 3: Complete the SBA worksheet /sba- initial_capital_requirement.xlsx /sba- initial_capital_requirement.xlsx